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Chapter 13, Mortgage Arrears, and Personal Income Taxes

Many individuals who file for protection under Chapter 13 do so in order to bring their mortgage current; also referred to as curing mortgage arrears. Often times, people who have been attempting a loan modification or who have lost a job, have not made a mortgage payment in many months. In order to avoid foreclosure, their lender demands that the individual now come up with a very large lump sum payment (usually including penalties and other fees) in order to pay back those mortgage payments which went unpaid over the course of the previous months. Rarely will the individual or family have the resources to make this massive lump sum payment to avoid the foreclosure and reinstate their mortgage. In this scenario, a Chapter 13 filing allows a person to pay back all those missed payments, the mortgage arrears, over a period of up to five years.

Since an individual in a Chapter 13 is now staying current on their mortgage payment each month on a going forward basis AND making a payment to the bankruptcy trustee to pay back their missed payments on the mortgage from prior to filing their Chapter 13; are they able to deduct all the mortgage interest they are paying on their personal income taxes? And, the simple answer is yes; if you are curing your mortgage arrears in a Chapter 13 plan, you’re able to deduct any mortgage interest associated with those mortgage arrears on your personal income taxes.

Cathy Moran illustrates this issue very clearly in her article titled, “Stalking the Wily Tax Deduction” posted at the Bankruptcy Law Network. Mrs. Moran is a certified consumer bankruptcy specialist, has been in practice over 30 years, is the Northern California Chair for the NACBA, and is quite simply a consumer bankruptcy guru. In addition to the achievements cited above, Mrs. Moran is the author and creator of Bankruptcy Mastery, an invaluable resource for consumer bankruptcy attorneys and consumers who want to learn more about bankruptcy.

From “Stalking the Wily Tax Deduction” by Cathy Moran:

“Until very late in most 30 year mortgages, a substantial amount of each monthly payment on your home loan is interest. That mortgage interest can be deducted if you itemize deductions.”“If your Chapter 13 plan is catching up home loan arrears, look at your trustee’s annual report for some deductible mortgage interest.”

If you are currently involved in a Chapter 13 repayment plan that includes curing mortgage arrears or simply want more information on the same, please click here to read the entire article by Mrs. Moran titled, “Stalking the Wily Tax Deduction”.

About the Author
Christian Spaulding is the founder and principal attorney at Spaulding Law Group. Mr. Spaulding has lived in Southern California his entire life and his family has been in Southern California since the late 1800’s. Mr. Spaulding received his undergraduate degree from Chapman University in Orange with a Bachelor of Science in Accounting. While completing his undergraduate studies, Mr. Spaulding was the recipient of the prestigious Wall Street Journal Student Business Award. Mr. Spaulding graduated at the top of his accounting program at Chapman University and attended law school at Chapman University School of Law where he was a Merit Scholarship recipient. Mr. Spaulding has focused his firm’s practice solely on consumer protection and bankruptcy since 2009.

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